It is that time of the year when the Reserve Bank of India (RBI), which follows July-June financial year, comes up with the announcement of its transfer of surplus to the government. This year the timing could not be better for the government, which has been facing slowdown blues, compelling finance minister Nirmala Sitharaman to address the macro woes with a slew of measures last Friday evening.

This time the announcement assumed more significance owing to the fact that the RBI, in consultation with the government, had constituted an expert committee under former RBI governor Dr. Bimal Jalan to review the extant economic capital framework (ECF) of the Reserve Bank of India.

The RBI, accepting all the recommendations of the committee, has announced that it will transfer ₹1.23 lakh crore of surplus and excess risk provisions of ₹52,637 crore identified according to the revised ECF.

The Bimal Jalan committee recommended a surplus distribution policy that targets the level of realised equity to be maintained by the RBI within the overall level of its economic capital whereas the earlier policy targeted total economic capital level alone. Economic capital comprises realised equity and revaluation balances. “Only if realised equity is above its requirement, will the entire net income be transferable to the Government,” the committee recommended. “If it is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government,” it added. “Within the range of CRB (contingent risk buffer)—6.5% to 5.5% of the balance sheet—the central board of the RBI will decide on the level of risk provisioning.”

Given that the available realised equity stood at 6.8% of the RBI’s balance sheet, there was excess of risk provisioning to the extent of ₹11,608 crore at the upper bound of CRB and ₹52,637 crore at the lower bound of CRB. “The Central Board decided to maintain the realised equity level at 5.5% of balance sheet and the resultant excess risk provisions of ₹52,637 crore were written back,” RBI said in a release.

The RBI central board said the economic capital as on June 30, 2019, stood at 23.3% of its balance sheet, which is within the revised range of 24.5% to 20.0%. As financial resilience was within the desired range, the central board of the RBI decided that the entire net income of ₹1,23,414 crore for FY19, of which an amount of ₹28,000 crore was already paid as interim dividend, be transferred to the government.

The release also highlights that at the end of June 2019—the close of the central bank’s latest financial year—the RBI is among central banks with the highest levels of financial resilience. But the crucial point here is that the government, which had budgeted an inflow of ₹90,000 crore has ₹57,781 crore extra in its kitty which will help it to achieve its fiscal targets.

According to Nomura economists Sonal Varma and Aurodeep Nandi, who expected the RBI to transfer ₹95,000 crore, the ultimate size of the dividend transfer to the government is higher than their expectation by ₹53,000 crore or close to 0.25% of GDP. “While there are reports that the government may use this surplus to declare additional fiscal stimulus in reaction to sagging growth, we believe the space for this is limited,” Varma and Nandi noted. In the duo’s view, the current fiscal deficit target of 3.3% of GDP is contingent on relatively aggressive assumptions on tax collections and higher nominal GDP growth than what may actually be realised. In a weak growth environment, revenue targets are likely to disappoint. The Nomura duo expects the shortfall in tax revenues to be close to ₹1 lakh crore—approximately 0.5% of GDP. “Thus gains from excess RBI dividends are likely to be utilised to bridge the revenue shortfall rather than engage in stimulus measures,” Varma and Nandi note.

According to Bank of America Merrill Lynch’s India economists Indranil Sen Gupta and Aastha Gudwani, the surplus will likely be used to fund the ₹70,000 crore recapitalisation of PSU banks announced by the finance minister on Friday. “The balance will likely be transferred to the fisc as already budgeted,” the economist duo opines.

Nomura’s Varma and Nandi point out that contrary to market expectations, the Bimal Jalan Committee recommendations ruled out the prospect of sizeable transfer of RBI’s reserves. “This primarily reflects the exclusion of revaluation reserves from the excess capital calculation,” the duo pointed out.

Consequently, while the government’s FY20 budget is likely to benefit from a handsome dividend from the RBI, the committee’s framework does not necessarily guarantee higher payouts in forthcoming years. “From an institutional perspective, we believe the recommendations adequately ring-fence the RBI’s capacity to deal with risks that it faces as the economy’s “lender of the last resort” as well as the credit and operational risks,” Varma and Nandi noted.

While Citi analysts are of similar view, they expect that hope of fiscal stimulus from this windfall should keep equities buoyant in the near term. However, the S&P BSE Sensex has swung just below 237 points to touch the day’s high of 37,731.51 until 1.45 p.m. on August 27 against the closing value of 37,494.12 on August 26 when the index swelled nearly 800 points on the back of the finance minister’s stimulus announcements on last Friday evening. It seems that equity markets are not keen to trade their sanity on an extended basis for positive news coming their way.

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